FEDERATED STATES OF MICRONESIA SOCIAL SECURITY ADMINISTRATION (A COMPONENT UNIT OF THE FEDERATED STATES OF MICRONESIA NATIONAL GOVERNMENT)

Transcription

1 FEDERATED STATES OF MICRONESIA SOCIAL SECURITY ADMINISTRATION (A COMPONENT UNIT OF THE FEDERATED STATES OF MICRONESIA FINANCIAL STATEMENTS, ADDITIONAL INFORMATION AND INDEPENDENT AUDITORS' REPORT YEARS ENDED DECEMBER 31, 2014 AND 2013

2 Years Ended December 31, 2014 and 2013 Table of Contents Page No. I. INDEPENDENT AUDITORS REPORT 1 II. MANAGEMENT S DISCUSSION AND ANALYSIS 4 III. BASIC FINANCIAL STATEMENTS: Statements of Fiduciary Net Position 11 Statements of Changes in Fiduciary Net Position 12 Notes to Financial Statements 13 IV. OTHER SUPPLEMENTARY INFORMATION Combining Statement of Fiduciary Net Position 23 Combining Statement of Changes in Fiduciary Net Position 24 V. INDEPENDENT AUDITORS REPORT ON COMPLIANCE WITH LAWS AND REGULATIONS Independent Auditors Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on An Audit of Financial Statements Performed in Accordance with Government Auditing Standards 25 Summary Schedule of Prior Year Findings 27

3 Deloitte & Touche LLP 361 South Marine Corps Drive Tamuning, GU USA Tel: (671) Fax: (671) INDEPENDENT AUDITORS' REPORT Board of Trustees FSM Social Security Administration: Report on the Financial Statements We have audited the accompanying financial statements of the Federated States of Micronesia (FSM) Social Security Administration (the Administration), a component unit of the FSM National Government, which comprise the statements of fiduciary net position as of December 31, 2014 and 2013, and the related statements of changes in fiduciary net position for the years then ended, and the related notes to the financial statements. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors' Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 1

4 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the FSM Social Security Administration as of December 31, 2014 and 2013, and the changes in its net position for the years then ended in accordance with accounting principles generally accepted in the United States of America. Emphasis of Matter As discussed in Note 4 to the financial statements, the actual valuation report as of January 1, 2014 showed a total accrued liability of $307,613,000 and the market value of trust assets of $49,134,000, resulting in a funded ratio of 16%. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the Management s Discussion and Analysis on pages 4 through 10 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. This supplementary information is the responsibility of the Administration s management. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information Our audits were conducted for the purpose of forming an opinion on the financial statements that collectively comprise the Administration s basic financial statements. The Other Supplementary Information listed in the accompanying table of contents is presented for purposes of additional analysis and is not a required part of the basic financial statements. The Other Supplementary Information is the responsibility of the Administration s management and was derived from and relate directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standard generally accepted in the United States of America. In our opinion, the Other Supplementary Information is fairly stated, in all material respects, in relation to the basic financial statements as a whole. 2

5 Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated June 2, 2015, on our consideration of the Administration's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Administration s internal control over financial reporting and compliance. June 2,

6 Management s Discussion and Analysis Years Ended December 31, 2014 and 2013 The following discussion and analysis provides an understanding of the FSM Social Security Administration s (FSMSSA) financial performance for fiscal year ended December 31, This section has been prepared by the management and should be read in conjunction with the FSMSSA s financial statements and accompanying notes. Administration The FSMSSA is a successor System of the former Trust Territory Social Security System. It was established by the Federated States of Micronesia Public Law 2-74 and began its full operation on January 1, The FSMSSA provides retirement, disability and survivor benefits to the citizens of the Federated States of Micronesia. Under Title 53 of the FSM Code, the authority to administer the FSMSSA is vested to a six-member Board of Trustees, five of whom are nominated by the President and confirmed by the Congress of the FSM. The nominations to the Board take into account the need to have adequate geographical representation and to have representatives from public and private sector employers and employees. The members and officers of the Board of Trustees are as follows: Gillian Doone National Government Chairman of the Board Kalwin Kephas State of Kosrae Member Vacant State of Pohnpei Member Nakama Sana State of Chuuk Member Vincent Tafileluw State of Yap Vice Chairman Alexander R. Narruhn Administrator Member, Ex officio The Administrator, who is selected by the Board, is responsible for daily operation as well as supervision of branch managers from each of the four States of the FSM. Funding The FSM Social Security System is financed by employer/employee contributions at a rate of 7.5% each, or a combined tax rate of 15% paid to the system every quarter. The National and State governments as well as all private employers incorporated or doing business in the FSM are subject to social security tax. Beginning January 1, 2013, the maximum quarterly taxable wage of $6,000 is subject to an increment of $1,000 and every 5 years thereafter for a maximum of $10,000 until January 1, Effective January 1, 2013, both the tax rate and the maximum quarterly taxable wage have been increased from 7% to 7.5% (employee 7.5%, employer 7.5%) and from $6,000 to $7,000, respectively. Additional revenues are derived from interest and penalties charged to delinquent taxpayers, and other miscellaneous fees. Budget The FSM Public Law mandates the FSMSSA to present an annual budget not exceeding 11% of its projected income for the ensuing fiscal year. The budget ceiling for year 2014 based on projected income of $16.70 million was $1.84 million. However, as part of management s cost cutting measures, the budget was streamlined at $1.27 million which is 7.6% of the projected income. The actual administrative costs incurred for 2014 were $1.12 million, or a 12% surplus compared to the approved budget. 4

7 Highlights FEDERATED STATES OF MICRONESIA SOCIAL SECURITY ADMINISTRATION Management s Discussion and Analysis Years Ended December 31, 2014 and 2013 Contributions collected increased by 2.3% from $17.24 million in 2013 to $17.64 million in Total benefit payments to members or their beneficiaries increased by 3% from $18.43 million in 2013 to $18.99 million in ,470 beneficiaries received social security benefits as of end of year retirement, survivor and disability claims were received and processed in year The investment portfolio including marketable securities and money market funds increased by 3.64% from $43.74 million in 2013 to $45.33 million in A drawdown of $1.0 million was made from the investment portfolio to supplement benefit payments. Received $1.0 million in funding from the FSM National Government, which was used to supplement benefit payments. Net position totaled $50.13 million in December 31, 2014, compared to $48.89 million in December 31, 2013, an increase of 2.54%. $1,103,931 from delinquent accounts were collected in year Close monitoring of expenses led to a budget surplus of 12% in year Received $294,083 from Prior Service Trust Fund Administration (PSTFA). Prior Service benefits paid in 2014 totaled $308,195. Effective January 1, 2013, the tax rate and maximum taxable wages have been increased from 7% to 7.5% (employee 7.5%, employer 7.5%) and from $6,000 to $7,000, respectively. 5

8 Management s Discussion and Analysis Years Ended December 31, 2014 and 2013 RESULTS OF OPERATIONS / CHANGES IN NET POSITION FSMSSA follows the calendar year as its reporting year. The following table presents information about FSMSSA results of operations for CY2014, 2013 and Contributions $ 17,641,983 $ 17,244,974 $ 16,371,874 Benefit Payments (18,985,730) (18,431,758) (17,745,448) Administrative Expenses (1,121,686) (1,156,701) (1,035,997) Other Income 1,046,328 1,041,065 1,044,444 Operating Deficit (1,419,105) (1,302,420) (1,365,127) Investment Income/(Loss), net 2,659,510 7,502,456 3,669,947 Change in Net Position 1,240,405 6,200,036 2,304,820 Net Position at beginning of year 48,887,325 42,687,289 40,382,469 Net Position at end of year $ 50,127,730 $ 48,887,325 $ 42,687,289 Contributions: Government $ 8,650,038 $ 8,521,409 $ 7,901,969 Private 8,783,794 8,523,577 8,266,665 Judgment 54,844 12,617 18,854 Penalties & Interests 153, , ,386 Total $ 17,641,983 $ 17,244,974 $ 16,371,874 The total amount of contributions collected was $17.64 million, averaging a collection of $4.41 million per quarter. This amount constitutes an increase of 2.3% compared to 2013 at $17.24 million. The higher collection was attributed mainly to the increased collection of delinquent taxes. Amount collected from delinquent taxes rose to $1,103,931 in 2014 compared to $952,959 in Benefit Payments: Retirement $ 11,692,921 $ 11,457,404 $ 11,038,569 Survivors 5,420,464 5,189,255 5,068,023 Disability 1,502,864 1,523,375 1,456,825 Lump Sum 369, , ,031 Total $ 18,985,730 $ 18,431,758 $ 17,745,448 Benefit payments increased by 3% from $18.43 million in 2013 to $18.99 million in The increase was attributed mainly to new claims received processed and approved during the year. There were 916 new claims received and processed in 2014 as compared to 849 in As of December 31, 2014, there were 6,470 members or their beneficiaries who received benefits in year

9 Administrative Expense: Management s Discussion and Analysis Years Ended December 31, 2014 and Budget $1,269,455 $1,255,695 $1,115,902 Actual $1,121,686 $1,156,701 $1,035,997 Surplus $ 147,769 $ 98,994 $ 79,905 % of Budget 12% 8% 7% Administrative expense decreased by $35,015 or 3%. Management continuously monitors its operating expenses and implements cost cutting measures resulting in a budget surplus of 12% this year. Part of the surplus was the unused portion of the board expense as a result of the unfilled vacancy for the Pohnpei board member. Investment Income / (Loss): Investment $ 45,329,658 $ 43,736,351 $ 37,206,732 Income / (Loss) $ 2,659,510 $ 7,502,456 $ 3,669,947 Drawdowns $ 1,000,000 $ 1,000,000 $ 1,000,000 Investment income decreased by 64.5% to $2.66 million in 2014 compared to $7.50 million in Investment returns in 2013 was at 20% and was so far the highest since the inception of the investment portfolio compared to 2014 investment returns of 6%. The market value of the investment portfolio stood at $45.33 million as of end of The amount is net of a $1.0 million drawdown that was used to supplement benefit payments in addition to the $1.0 million funding received from the FSM National Government. Other Income: Appropriations from FSM Government $ 1,000,000 $ 1,000,000 $ 1,000,000 Prior Service Reimbursement 44,486 44,649 47,334 Miscellaneous Receipts 24,864 26,438 31,661 Tax Refunds (23,022) (30,022) (34,551) Total $ 1,046,328 $ 1,041,065 $ 1,044,444 Other income increased by $5,263 or 0.51%. Income received from Prior Service reimbursement was equivalent to 20% of benefits paid. The amount included $3,900 admin fees for processing the one time cola payment to PS beneficiaries amounting to $105,400. Miscellaneous receipts are fees collected from ss cards, employer s ID card, request for allotments and request for change of address. 7

10 NET POSITION FEDERATED STATES OF MICRONESIA SOCIAL SECURITY ADMINISTRATION Management s Discussion and Analysis Years Ended December 31, 2014 and 2013 FSMSSA Statements of Net Position as of December 31, 2014, 2013 and 2012 follows: Assets Cash and equivalents $ 2,020,467 $ 1,931,021 $ 2,244,250 Investments 45,329,658 43,736,351 37,206,732 Other current assets 2,867,721 3,293,007 3,424,074 Fixed assets, net 81, , ,841 Total 50,299,620 49,067,531 42,977,897 Liabilities 171, , ,608 Net Position Held in trust for retirement, disability and survivors benefits $ 50,127,730 $ 48,887,325 $ 42,687,289 Net position for the retirement fund (excluding the Prior Service Fund) increased by 2.54% from $48.89 million in 2013 to $50.13 million in The increase was attributed mainly to the net investment gain as a result of a higher market value of the portfolio as of the end of the year The FSMSSA continues to manage the Prior Service Benefits Program for FSM citizens, which is funded by the U.S. Department of Interior, Office of the Insular Affairs. For FY 2014, total funds received from the Prior Service Trust Fund Administration (PSTFA) amounted to $294,083 while benefits paid and administrative expenses totaled $308,195 and $44,522, respectively. As of December 31, 2014, the Prior Service Fund had net position of $189,547. Contributions decreased by 18.61% while benefit payments increased by 38.05%. Benefit payments in 2014 included the one-time cola payment of $105,400. Capital assets are not material to FSMSSA operations. assets can be found at note 2F to the financial statements. Additional information concerning capital Following are the Statements of Net Position as of December 31, 2014, 2013, & 2012 and Statements of Changes in Net Position for the years ended December 31, 2014, 2013, & 2012 of PSTFA. Statements of Net Position (Prior Service fund) Assets $ 232,355 $ 299,712 $ 196,297 Liabilities (42,808) (53,497) (44,050) Net position $ 189,547 $ 246,215 $ 152,247 8

11 Management s Discussion and Analysis Years Ended December 31, 2014 and 2013 Statements of Changes in Net Position (Prior Service Fund) PSTFA contributions $ 294,083 $ 361,324 $ 408,879 Benefit Payments (308,195) (223,247) (236,645) Administrative expenses (44,522) (44,670) (47,373) Other 1, Change in net position (56,668) 93, ,347 Net position at beginning of year 246, ,247 26,900 Net position at end of year $ 189,547 $ 246,215 $ 152,247 Conclusion: The FSMSSA retirement fund net position in 2014 increased by $1.24 million or 2.54% compared to 2013 mainly due to the increased market value of the investment portfolio. However, the year saw another operating deficit due to imbalances between tax collections and benefit payments including administrative expenses. Total contributions collected were $17.64 million while benefits paid and administrative expenses totaled $18.99 million and $1.12 million, respectively resulting in an operating loss of $1.42 million. To cover the shortfall, $1.0 million was withdrawn from the investment portfolio. The FSM National Government also appropriated $1.0 million to supplement the benefit payments. The Board of Trustees, and management and staff of the FSMSSA will continue to pursue strategies that will help overcome some of the challenges that the Program faces. In 2014, we have managed to recover $1,103,931 in delinquent taxes, a major accomplishment considering the slow economic growth in the FSM. With increased benefit payments of 3% and 3.9% in fiscal years 2014 and 2013 respectively, and an unfunded accrued liability of $258.5M (as of January 1, 2014), management endeavors to improve its operation through the following: 1. Collection of delinquent taxes; 2. Spot audits; 3. Conduct periodic eligibility survey of current beneficiaries; 4. Monitor investment performance; and 5. Control administrative expenses. We would also request the FSM National Government to continue to extend financial assistance to FSMSSA to supplement its operational shortfall so that investment drawdown could be minimized and investment returns maximized. 9

12 2015 Outlook FEDERATED STATES OF MICRONESIA SOCIAL SECURITY ADMINISTRATION Management s Discussion and Analysis Years Ended December 31, 2014 and 2013 FSMSSA is projecting another operational loss in 2015 and approximately $3.5 million will be needed in supplemental funding to fully fund the benefits expected to be paid during the year. Collections for 2015 are projected to be at the same level as in 2014 since there will be no increases in tax rate and taxable wages until Any increase in collection, if any, could be partially offset by non-compliance of contribution payments from some employers. Despite new mandate imposing criminal penalties to employer offenders of FSM Social Security Act as mandated by PL15-73, there are still some employers who are non-compliance. Currently, the total taxes due from active delinquent employers totaled $1,498,331. Of this amount, $346,610 is under judgment accounts. Management will continue to remain focus on increasing collections from delinquent accounts and to make employers pay their current quarterly tax dues by ongoing spot audits that will include most of the employers in all of the FSM States. Having said this, collections from contributions are estimated to be approximately $17.6 million including collection from delinquent accounts. Benefit payments will continue to increase in 2015 because of new claims that will be received, processed and approved during the year. Based on the yearly average increase of benefit payments during the past 2 years, it is projected that benefits in 2015 will be around $19.65 million or an increase of 3.5% compared to Administrative cost is projected to be lower if not approximately equal compared to Management will continue to implement the cost cutting measures being practiced during the past several years. Foregoing, benefit payments will increase faster than collection. It is projected that approximately $3.5 million will be needed in additional funding to supplement benefit payments and administrative expenses in The deficit is anticipated to be funded with cash withdrawal from investment and/or funding from the FSM National Government. This MD&A is designed to provide our citizens, taxpayers, creditors and other interested parties with a general overview of the FSMSSA s finances and to demonstrate its accountability to funding agencies. Questions concerning any of the information provided in this discussion or requests for information should be addressed to the Administrator, FSM Social Security Administration at P.O. Box L, Kolonia, Pohnpei, FSM Management s Discussion and Analysis for the year ended December 31, 2013 is set forth in the Administration s report on the audit of financial statements, which is dated May 26, That Discussion and Analysis explains the major factors impacting the 2013 financial statements and can be viewed at the Office of the Public Auditor s website at 10

13 FEDERATED STATES OF MICRONESIA SOCIAL SECURITY ADMINISTRATION Statements of Fiduciary Net Position December 31, 2014 and 2013 ASSETS Cash and cash equivalents $ 2,252,822 $ 2,229,804 Receivables: Contributions 2,773,881 2,679,938 Due from FSM National Government - 500,000 Accrued interest 87,032 92,317 Other 5,008 18,081 Total receivables 2,865,921 3,290,336 Prepayments 1,800 3,600 Investments: Fixed income 14,691,607 13,657,716 Stocks 30,638,051 30,078,635 Total investments 45,329,658 43,736,351 Depreciable fixed assets, net 81, ,152 Total assets 50,531,975 49,367,243 LIABILITIES Accounts payable 183, ,212 Other liabilities and accruals 25,380 25,638 Accrued management fees 6,041 8,853 Total liabilities 214, ,703 Contingencies NET POSITION Held in trust for retirement, disability and survivors' benefits $ 50,317,277 $ 49,133,540 See accompanying notes to financial statements. 11

14 FEDERATED STATES OF MICRONESIA SOCIAL SECURITY ADMINISTRATION Statements of Changes in Fiduciary Net Position Years Ended December 31, 2014 and Additions: Contributions $ 17,641,983 $ 17,244,974 Investment income: Net change in the fair value of investments 2,025,184 6,922,493 Interest and dividends 869, ,310 Total investment income 2,895,176 7,755,803 Less investment expense: Investment management and custodial fees (235,249) (252,786) Net investment income 2,659,927 7,503,017 Other additions: Contributions from FSM National Government 1,000,000 1,000,000 Other 364, ,411 1,364,982 1,432,411 Total additions 21,666,892 26,180,402 Deductions: Benefit payments: Retirement 11,799,765 11,544,359 Survivors 5,621,815 5,325,547 Disability 1,502,864 1,523,375 Lump sum 369, ,724 Total benefit payments 19,293,925 18,655,005 Refunds 23,022 30,022 Administrative 1,166,208 1,201,371 Total deductions 20,483,155 19,886,398 Change in net position 1,183,737 6,294,004 Net position at beginning of year 49,133,540 42,839,536 Net position at end of year $ 50,317,277 $ 49,133,540 See accompanying notes to financial statements. 12

15 Notes to Financial Statements December 31, 2014 and 2013 (1) Organization The Social Security Administration of the Federated States of Micronesia (FSM) National Government was established by Public Law 2-74, passed on February 8, 1983, and began operations on October 1, 1987, for the purpose of administering the FSM Social Security Retirement Fund (the Fund) through the provision of retirement, disability and death benefits to qualified individuals and their survivors. The Administration is administered under the authority of a six-member Board of Trustees, five of whom are appointed by the President of the Federated States of Micronesia. The Administrator, who is selected by the Board, serves as an ex-officio member. Additionally, the Administrator is responsible for processing, monitoring and distributing benefit claims under the Prior Service Benefits Program (see note 6). Accordingly, the Administrator established the Prior Service Fund to account for activities under this program. (2) Summary of Significant Accounting Policies A. Basis of Accounting The FSM Social Security Administration (the Administration) is accounted for as a Fiduciary Fund Type - Private Purpose Trust Fund and is a component unit of the FSM National Government. The Administration prepares its financial statements using the accrual basis of accounting. It recognizes employee and employer contributions as revenues in the quarter employee earnings are paid. Retirement benefits are recognized as expenses when payable. Expenses are recorded when the corresponding liabilities are incurred regardless of when payment is made. Governmental Accounting Standards Board (GASB) Statement No. 34, Basic Financial Statements - and Management s Discussion and Analysis - for State and Local Governments, which was subsequently amended by Statement No. 37, Basic Financial Statements - and Management s Discussion and Analysis - for State and Local Governments: Omnibus and modified by Statement No. 38, Certain Financial Statement Note Disclosures, establish financial reporting standards for governmental entities, which includes the requirement for the Administration to present Management s Discussion and Analysis (MD&A). The MD&A is considered to be required supplementary information and precedes the financial statements. In addition, these statements require that resources be classified for accounting and reporting purposes as held in trust for retirement, disability and survivors benefits. Management of the Administration has determined that per its enabling legislation, net position of the Administration is all held in trust for retirement, disability and survivors benefits. B. Future Liabilities and Contributions No recognition is given in the accompanying financial statements to the present value of the liabilities of prospective benefit payments or the present value of future contributions required from employees or employers. C. Cash and Cash Equivalents For the purposes of the statements of fiduciary net position, cash and cash equivalents include cash on hand, and cash in checking and savings accounts as well as short-term investments in money market funds with a maturity date within three months of the date acquired. 13

16 Notes to Financial Statements December 31, 2014 and 2013 (2) Summary of Significant Accounting Policies, Continued D. Investments Investments and related investment earnings are recorded at fair value. Fair value is the amount at which an investment could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. E. Deposits and Investments The deposit and investment policies of the Administration are governed by its enabling legislation. The Board is required to engage one or more fund custodians to assume responsibility for the physical possession of the Administration s investments. Legally authorized investments are as follows: (i) (ii) (iii) (iv) Government obligations - Obligations issued or guaranteed as to principal and interest by the FSM National Government and/or State governments of the Federated States of Micronesia or by the Government of the United States, provided that the principal and interest on each obligation are payable in the currency of the United States. Corporate obligations and mortgage-backed securities - Obligations of any public or private entity or corporation created or existing under the laws of the Federated States of Micronesia or of the United States or any state, territory or commonwealth thereof, or obligations of any other government or economic community which are payable in United States dollars, or pass through and other mortgage-backed securities provided that the obligation is issued by an agency of the United States Government, the FSM National Government, or is rated in one of the three highest categories by two nationally recognized rating agencies. No investment under this heading shall exceed ten percent of the market value of the Fund or ten percent of the outstanding value of the issue at the time of purchase. Preferred and common stocks - Shares of preferred or common stocks of any corporation created or existing under the laws of the Federated States of Micronesia or under the laws of the United States or any state, territory or commonwealth thereof provided that the purchase of such shares shall be considered reasonable and prudent by the Administration s investment advisor at the time of purchase, that not more than five percent of the market value of the Fund shall be invested in the stock of any one corporation, and that not more than ten percent of the market value of the Fund shall be invested in any one industry group. Insurance company obligations - Contracts and agreements supplemental thereto providing for participation in one or more accounts of a life insurance company authorized to do business in the Federated States of Micronesia or in any state, territory or commonwealth of the United States provided that the total market value of these investments at no time shall exceed ten percent of all investments of the Fund. 14

17 Notes to Financial Statements December 31, 2014 and 2013 (2) Summary of Significant Accounting Policies, Continued E. Deposits and Investments, Continued Deposits: Custodial credit risk is the risk that in the event of a bank failure, the Administration s deposits may not be returned to it. Such deposits are not covered by depository insurance and are either uncollateralized or collateralized with securities held by the pledging financial institution or held by the pledging financial institution but not in the depositor-government s name. The Administration does not have a deposit policy for custodial credit risk. As of December 31, 2014 and 2013, the carrying amount of the Administration s total cash and cash equivalents was $2,252,822 and $2,229,804, respectively, and the corresponding bank balances were $2,453,786 and $2,569,851, respectively. As of December 31, 2014 and 2013, bank deposits in the amount of $1,025,975 and $1,201,127, respectively, were maintained in financial institutions subject to Federal Deposit Insurance Corporation (FDIC) insurance. As of December 31, 2014 and 2013, bank deposits in the amount of $500,000 were FDIC insured. The Administration does not require collateralization of its cash deposits; therefore, deposit levels in excess of FDIC insurance coverage are uncollateralized. Accordingly, these deposits are exposed to custodial credit risk. The remaining amounts of $1,428,711 and $1,368,724, respectively, represent short-term investments held and administered by the Administration s trustees in accordance with various trust agreements. Based on negotiated trust and custody contracts, all of these investments were held in the Administration s name by the Administration s custodial financial institutions at December 31, 2014 and Investments: As of December 31, 2014 and 2013, investments at fair value are as follows: Fixed income securities: Domestic fixed income $ 14,691,607 $ 13,657,716 Other investments: Domestic equities 23,837,368 22,725,474 International equities 6,800,683 7,353,161 $ 45,329,658 $ 43,736,351 Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of debt instruments. The Administrator does not have a formal investment policy that limits investment maturities as a means of managing its exposure to fair value losses arising from increasing interest rates. 15

18 Notes to Financial Statements December 31, 2014 and 2013 (2) Summary of Significant Accounting Policies, Continued E. Deposits and Investments, Continued Investments, Continued As of December 31, 2014, the Administration s investments in fixed income securities were as follows: Investment Maturities (In Years) Less Greater Fair Than 1 1 to 5 6 to 10 Than 10 Value U.S. Treasury obligations $ 799,955 $ 2,383,408 $ 2,956,927 $ 231,116 $ 6,371,406 Mortgage and asset-backed securities 80,970 1,680, ,369 2,121,031 4,156,440 Municipal bonds - 64, ,694 Corporate notes and bonds 68,723 1,251,433 1,775,426 1,003,485 4,099,067 $ 949,648 $ 5,379,605 $ 5,006,722 $ 3,355,632 $ 14,691,607 As of December 31, 2013, the Administration s investments in fixed income securities were as follows: Investment Maturities (In Years) Less Greater Fair Than 1 1 to 5 6 to 10 Than 10 Value U.S. Treasury obligations $ 1,354,756 $ 1,002,134 $ 936,283 $ - $ 3,293,173 Mortgage and asset-backed securities - 1,795, ,743 2,715,849 4,705,944 Municipal bonds - 63, ,609 Corporate notes and bonds - 1,510,572 2,802,937 1,281,481 5,594,990 $ 1,354,756 $ 4,371,667 $ 3,933,963 $ 3,997,330 $ 13,657,716 Credit risk for investments is the risk that an issuer or other counterparty to an investment will not fulfill its obligation. The Administration s exposure to credit risk at December 31, 2014, was as follows: Standard and Poors Rating Domestic AAA $ 5,879,962 AA+ 1,427,579 AA 44,248 AA- 450,832 A+ 88,409 A 382,361 A- 940,121 BBB+ 448,352 BB+ 86,236 BBB 1,198,371 BBB- 344,685 Not rated 3,400,451 $ 14,691,607 16

19 Notes to Financial Statements December 31, 2014 and 2013 (2) Summary of Significant Accounting Policies, Continued E. Deposits and Investments, Continued Investments, Continued: The Administration s exposure to credit risk at December 31, 2013, was as follows: Standard and Poors Rating Domestic AAA $ 3,293,173 AA+ 4,878,596 AA 40,959 AA- 306,774 A+ 140,872 A 740,799 A- 2,015,550 BBB+ 599,072 BB+ 26,713 BBB 1,085,080 BBB- 413,092 Not rated 117,036 $ 13,657,716 Custodial credit risk for investments is the risk that in the event of the failure of the counterparty to the transaction, the Administration will not be able to recover the value of investment or collateral securities that are in the possession of an outside party. The Administration s investments are held and administered by trustees. Based on negotiated trust and custody contracts, all of these investments were held in the Administration s name by the Administration s custodial financial institutions at December 31, 2014 and The Administration s agent is not affiliated with or related to investment brokers. Accordingly, these investments are not exposed to custodial credit risk. Concentration of credit risk for investments is the risk of loss attributed to the magnitude of an entity s investment in a single issuer. GASB Statement No. 40 requires disclosure by issuer and amount of investments in any one issuer that represents five percent (5%) or more of total investments for the Administration. Investments issued or explicitly guaranteed by the U.S. government and investments in mutual funds, external investment pools, and other pooled investments are excluded from this requirement. There was no concentration of credit risk for investments as of December 31, 2014 and F. Depreciable Fixed Assets The cost of fixed assets, if greater than $250, is capitalized at the time of acquisition. Depreciation is provided using the straight-line basis over the estimated useful lives of the respective assets. 17

20 Notes to Financial Statements December 31, 2014 and 2013 (2) Summary of Significant Accounting Policies, Continued F. Depreciable Fixed Assets, Continued Capital asset activity for the years ended December 31, 2014 and 2013, was as follows: Estimated January 1, December 31, Useful Lives 2014 Additions Retirements 2014 Motor vehicles 5 years $ 111,026 $ 8,205 $ (5,825) $ 113,406 Computer software and hardware 5 years 136,270 5,955 (11,324) 130,901 Office furniture, fixtures and equipment Home furnishings 5 years 5 years 103,595 5,996 1, ,827 5, ,887 15,392 (17,149) 355,130 Less accumulated depreciation (249,735) (38,908) 15,287 (273,356) $ 107,152 $ (23,516) $ (1,862) $ 81,774 Estimated January 1, December 31, Useful Lives 2013 Additions Retirements 2013 Motor vehicles 5 years $ 107,880 $ 7,025 $ (3,879) $ 111,026 Computer software and hardware Office furniture, fixtures 5 years 158,262 17,003 (13,850) 161,415 and equipment Home furnishings 5 years 5 years 68,157 6,738 12,707 2,047 (5,203) - 75,661 8, ,037 38,782 (22,932) 356,887 Less accumulated depreciation (238,196) (34,471) 22,932 (249,735) G. Deferred Outflows of Resources $ 102,841 $ 4,311 $ - $ 107,152 In addition to assets, the statements of fiduciary net position will sometimes report a separate section for deferred outflows of resources. This separate financial statement element, deferred outflows of resources represents a consumption of net position that applies to a future period and so will not be recognized as an outflow of resources (deduction of net position) until then. The Administration has no items that qualify for reporting in this category. H. Deferred Inflows of Resources In addition to liabilities, the statements of fiduciary net position will sometimes report a separate section for deferred inflows of resources. This separate financial statement element, deferred inflows of resources represents an acquisition of net position that applies to a future period and so will not be recognized as an inflow of resources (additions to net position) until then. The Administration has no items that qualify for reporting in this category. 18

21 Notes to Financial Statements December 31, 2014 and 2013 (2) Summary of Significant Accounting Policies, Continued I. Contributions Contributions to the Fund are governed by the Federated States of Micronesia Social Security Act of 1983 (the Act ), which imposes a tax on the quarterly income of every employee not currently subject to the United States Social Security Administration or any other recognized social security system. There is imposed on the income of every applicable employee a tax equal to 7.5% of wages effective January 1, Maximum quarterly taxable wages are currently $7,000 effective January 1, Every employer is required to contribute an amount equal to that contributed by employees. Contribution revenues recorded during the years ended December 31, 2014 and 2013 are comprised of the following: Government employment $ 8,650,038 $ 8,521,408 Private employment 8,783,794 8,523,577 Judgments 54,844 12,617 Penalties and interest 153, ,372 J. Benefit Obligations $ 17,641,983 $ 17,244,974 Benefits are paid to every person who is a fully insured individual as defined by the Act, has attained sixty years of age, and has filed an application for old age insurance benefits. Benefits are also paid to surviving spouses of deceased workers, subject to eligibility requirements, as long as they do not remarry or work. Eligible children who are not married or are not working may also receive benefits until age eighteen (18) or up to age twenty-two (22) if in school. Eligible children who become disabled before age twenty-two (22) will continue to receive benefits for the duration of the disability. Disability benefits are paid to qualified workers for the duration of the disability or until retirement or death at which time retirement or survivor benefits become available. Benefits are paid monthly and are computed on an annual basis of 16.5% of the first $10,000 of cumulative covered earnings, plus 3% of the next $30,000, 2% of any earnings in excess of $40,000, and 1% of any earnings in excess of $302,500. As of December 31, 2014 and 2013, the minimum monthly benefit payment is $

22 Notes to Financial Statements December 31, 2014 and 2013 (2) Summary of Significant Accounting Policies, Continued K. New Accounting Standards During the year ended December 31, 2014, the Administration implemented the following pronouncements: GASB Statement No. 67, Financial Reporting for Pension Plans, which revises existing guidance for the financial reports of most pension plans. The implementation of this statement did not have a material effect on the accompanying financial statements. GASB Statement No. 69, Government Combinations and Disposals of Government Operations, which improves accounting and financial reporting for state and local governments' combinations and disposals of government operations. Government combinations include mergers, acquisitions, and transfers of operations. A disposal of government operations can occur through a transfer to another government or a sale. The implementation of this statement did not have a material effect on the accompanying financial statements. GASB Statement No. 70, Accounting and Financial Reporting for Nonexchange Financial Guarantees, which requires a state or local government guarantor that offers a nonexchange financial guarantee to another organization or government to recognize a liability on its financial statements when it is more likely than not that the guarantor will be required to make a payment to the obligation holders under the agreement. The implementation of this statement did not have a material effect on the accompanying financial statements. In June 2012, GASB issued Statement No. 68, Accounting and Financial Reporting for Pensions, which revises and establishes new financial reporting requirements for most governments that provide their employees with pension benefits. The provisions in Statement 68 are effective for fiscal years beginning after June 15, Management has not yet determined the effect of implementation of this statement on the financial statements of the Administration. In November 2013, GASB issued Statement No. 71, Pension Transition for Contributions Made Subsequent to the Measurement Date - an amendment of GASB Statement No. 68, which addresses an issue regarding application of the transition provisions of Statement No. 68, Accounting and Financial Reporting for Pensions. The issue relates to amounts associated with contributions, if any, made by a state or local government employer or nonemployer contributing entity to a defined benefit pension plan after the measurement date of the government s beginning net pension liability. The provisions in Statement 71 are effective for fiscal years beginning after June 15, Management has not yet determined the effect of implementation of this statement on the financial statements of the Administration. 20

23 Notes to Financial Statements December 31, 2014 and 2013 (2) Summary of Significant Accounting Policies, Continued L. Management Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) require management to make estimates and assumptions that affect the reported amounts of net position and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. M. Risk Management The Administration is exposed to various risks of loss related to torts; theft of, damage to, and destruction of assets; errors and omissions; injuries to employees; and natural disasters. The Administration has elected to purchase automobile and property and casualty insurance from independent third parties for the risks of loss to which it is exposed. The Administration is substantially self-insured for all other risks. Settled claims have not exceeded commercial coverage in any of the past three years. (3) Net Position Held in Trust Net position is held in trust to comply with the Social Security Act of All net position of the Administration is to be used for retirement, disability and survivors' benefits. (4) Contingencies The Administration is aware of liabilities of the fund related to retroactive benefit payments for wages not posted to the system due to unmatched social security numbers or names provided by employers, as well as liabilities related to overpayment of contributions. Management is unable to determine a reasonable estimate of the abovementioned liabilities at this time; however, management is of the opinion that the amount is not material to the financial statements as a whole. In January 2014, the Administration obtained an actuarial valuation of the Fund as of January 1, The valuation reported actuarial accrued liabilities for the Fund of $307,613,000 and a funded ratio of 16%. As of December 31, 2014 and 2013, the Administration recorded total fund equity of $50,127,730 and $48,887,325, respectively, in the Fund, as funds available to fund future benefit obligations. These conditions indicate that the Administration should not increase future or current benefits until a long-term trend of decreasing the unfunded accrued liability is realized. The Administration is of the opinion that there are outstanding contributions due to the Retirement Fund; however, a reasonable estimate of this amount cannot be made due primarily to noncompliance by employers. 21

24 Notes to Financial Statements December 31, 2014 and 2013 (5) Contributions from FSM National Government The Administration receives periodic subsidies for its operations from appropriations received from the Congress of the FSM. During the years ended December 31, 2014 and 2013, contributions from the FSM National Government amounted to $1,000,000 for each year, of which $0 and $500,000 is recorded as a receivable from the FSM National Government as of December 31, 2014 and 2013, respectively. (6) Prior Service Claims Under the terms of a Prior Service Claim Adjudication Service Agreement between the Social Security Administration of the Federated States of Micronesia and the Trust Territory Prior Service Trust Fund, the Administration is to provide for the processing of benefit claims and to assist in the monitoring of continuing eligibility under the Prior Service Program. The Prior Service Trust Fund Administration (PSTFA) will reimburse the Administration $8,000 per annum plus an amount equal to eight percent of the total amount of automated and manual benefit payments. Any cost for the Administration personnel who assist in searching and locating prior service documents in cooperation with the Prior Service Administration will be reimbursed on a dollar for dollar basis. On September 15, 2005, an agreement was entered into between the PSTFA Board and the U.S. Department of the Interior to delegate the Board s obligations and responsibility for the enrollees eligible for Prior Service Benefits Program to the Social Security Systems of the Republic of the Marshall Islands, the Republic of Palau, the Federated States of Micronesia and the Retirement Fund of the Commonwealth of the Northern Mariana Islands. Based on the agreement, the Social Security Administration (SSA) of each Government shall be entitled to an administrative fee not to exceed 20% of the share of allocated funds. The Administration assumed administrative functions and as of December 31, 2014 and 2013, had received an allocation of $295,632 and $361,324, respectively, from PSTFA of which $308,195 and $223,247 were paid as benefits during the years ended December 31, 2014 and 2013, respectively. However, while the Administration accepts the liability for any amounts received, the Administration does not accept the obligation to pay future benefits unless additional funds are received from PSTFA. As of December 31, 2014 and 2013, the amount available for future benefit payments under the Prior Service Benefits Program amounted to $189,547 and $246,215, respectively. 22